“This is going to work,” Michael Pachter, managing director at Wedbush Securities, told Yahoo Finance Live in a new interview.
“The trick here is to convince a subscriber who’s quitting that they can [cut their costs in half] and go from $15.49 down to $7.99,” the analyst continued.
Pachter added that Netflix has reached peak penetration levels in above-median income households in the U.S. and Canada, further underscoring the need for a more affordable, ad-supported option.
Bloomberg noted Netflix will play four minutes of ads for every hour of content. Pachter surmised many consumers won’t be phased by the disruption, citing the lengthy ad spots viewers endure during broadcast and cable television programs.
“Most consumers will tough it out,” he said, doubling down that the upcoming ad-supported tier will slow churn, or the number of customers that drop off the service.
“You’re going to see subscriber growth start back up, and then investors are going to be confident that this is a growth company — slow growth, but growing,” he stated, anticipating that Netflix’s share price will rise as a result.
Netflix shares are currently trading at around $224, flat over the last month but still down roughly 62% year-to-date.
Streaming platforms have battled a more fickle consumer in recent years.
According to data from subscriber-measurement firm Antenna cited by The Wall Street Journal, about 19% of subscribers to premium services — which includes Netflix, Hulu (DIS), Apple TV+ (AAPL), HBO Max (WBD), among others — canceled three or more subscriptions in the two years up to June, compared to just 6% in the two-year period leading up to June 2020.
This increased churn, coupled with stalling growth in domestic markets, has contributed to big losses in recent quarters with Netflix shedding 1 million subscribers in the second quarter, while Peacock (CMCSA) subscriptions remained flat.
To offset the subscriber slowdown and buoy revenues, price hikes and ad-supported options have hit virtually every streaming-facing media company as Wall Street looks beyond subscriber counts and zones in on profitability and free cash flow.
In addition to Netflix, Disney has also hopped on the ad-tier bandwagon, revealing the official launch date for its ad-supported offering will be December 8. This new tier will cost consumers $7.99 a month — the same price as Disney+’s current ad-free plan before prices jump 38% to $10.99 in December.
The price of Hulu’s ad-free service will rise by $2 a month to $14.99 beginning October 10. Hulu with ads will go up by $1, to $7.99 a month.
Apple TV+ is also rumored to be exploring an ad-supported option, while Warner Bros. Discovery revealed it will have three tiers once the combined HBO Max-Discovery+ platform when it debuts next summer.